Opinion: Medicare Needs the Magic of the Market

For the first time in 200 years, it seems, not a single physician serves the roughly 2200 people who live on the island.

As viewers of CBC’s national news recently learned, there is a severe doctor shortage on Fogo Island, off the east coast of Newfoundland and Labrador. In fact, for the first time in 200 years, it seems, not a single, solitary physician serves the roughly 2200 people who live on the island, and transportation, mainly by ferry to the mainland, is sporadic and not always that reliable, particularly in winter. At the best of times, it’s a six-hour journey to the nearest healthcare establishment.

Commentators such as the CBC blame this plight on everything but the kitchen sink: there are few amenities on the island; it’s too small; the cod fishery collapsed; there are other areas in Canada far more attractive, etc.

Thanks to socialized medicine, doctors are paid roughly the same for their efforts no matter where they are located.

Stuff and nonsense. The real underlying cause of the predicament is government mismanagement. To wit, thanks to socialized medicine, doctors are paid roughly the same for their efforts no matter where they are located. (For general practice in Newfoundland, their salaries range from $125,211 to $150,252, amounts that are modified by a complicated formula).

How is this unwise policy responsible for a tragedy in the making?

Consider an analogy. Why is it that neither Fogo Island nor all of Newfoundland suffers any similar shortage of plumbers, carpenters, accountants, musicians, mechanics, electricians, chefs, farmers, nor any of countless other professions and callings? The answer is a flexible price system and the “magic of the market,” in Ronald Reagan’s felicitous phraseology.

Suppose the supply shortage carried over to plumbers, for example, with too few in this neck of the woods, and, at least relatively, too many elsewhere. Market forces would click into operation. Plumbers’ wages would rise in Fogo and therefore fall, relatively, everywhere else. Adam Smith’s “invisible hand” would entice people who take care of our plumbing needs to “go east young man” and head for Fogo Island.

Newfoundland and Labrador do offer what amounts to isolation pay for doctors. But salary formulas don’t get the job done.

But this market force does not work for doctors since they cannot be paid enough extra for locating where they are the most needed. True, some provinces, including Newfoundland and Labrador, do offer what amounts to isolation pay for doctors. But salary formulas don’t necessarily get the job done. Sometimes to get where you want to go you gotta pay what you gotta pay.

The price system works in the manner described all throughout the warp and woof of the economy. Assume the ideal proportion between peas and carrots, from the consumers’ point of view, is 50-50. But at present, for some mysterious reason, the economy is laboring under a misallocation of resources of these two goods: We now have 90 percent peas and only 10 percent carrots. What will happen? If you’ve studied up on Econ 101, you know that the price of peas will fall and the price of carrots rise. Profits will be sucked out of peas and transferred to carrots. Farmers will switch from the one to the other. Any deviation from equal shares will immediately call forth such reactions. That 90 percent-10 percent distribution, if ever it occurred, would be traceable to some sort of government interference with free enterprise.

This is why the allocation of resources between shoes and cars, between shirts and computers, between all goods and services under laissez-faire capitalism, never moves too far away from optimal.

How, then, could the doctor shortage be solved? One way is for the authorities to adopt what is called “market socialism”: to try to mimic what the market would have done. They could keep raising doctors’ salaries in places like Fogo and lowering them elsewhere, until at least a rough approximation of their ideal geographical dispersion was attained. (Note the word “their”: the end result would not necessarily be congruent with the desires of consumers).

Government running the economy while trying to ape the free market is like trying to change the path of a large ship in a thick fog without radar.

If you think this a good idea, you are channeling the works of 20th-century socialist economists Oskar Lange, Abba Lerner, and Fredrick Taylor. You will appreciate the economies of Cuba, China, Venezuela and North Korea in this century and, historically, of Lenin’s New Economic Plan in the USSR, Dubcek’s in Czechoslovakia and Tito’s in Yugoslavia.

Government running the economy while trying to ape the free market is like trying to change the path of a large ship in a thick fog without radar: it takes a long, long time, and all too often the people at the helm get the direction wrong. And before they can right it, other changes call for yet a different policy. Friedrich Hayek showed that information flows are stultified and Ludwig von Mises showed that the entire system is irrational. The proof of this pudding is that with the best will in the world, presumably, even close bureaucratic steering of the system has to date proven a dismal failure for Fogo Island.

The only real solution for healthcare or anything else whose supply is important is to entirely separate it from governmental mismanagement.

This essay was originally published by Financial Post on August 4, 2022.

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About the Author: Walter Block

Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University, senior fellow of the Mises Institute, and regular columnist for LewRockwell.com.